Peter Schiff Was (And Is Still) Correct on the Financial Crisis
March 31, 2009 · Salvaterra · Print This Article
I am man enough to admit I was wrong about Peter Schiff. I thought he was a “doom and gloomer” who was incapable of being optimistic about the economy for whatever reason. Boy was I wrong.
The problem was that I wanted Schiff to be wrong, and I wanted his warnings to be exaggerations like many of the people you will see in this video. I did not want to believe that the money I had in the market was in danger because of a coming financial crisis from the mortgage industry. And seeing smart people like Ben Stein and Neil Cavuto downplaying or dismissing Schiff’s statements was the only excuse I needed to dismiss him myself.
I wish I could have that one back, but I can’t.
What I can do though is heed what Schiff is saying now, and I suggest everyone in the country do the same.
In the following video Schiff directly addresses the problems from 2005 through 2008 that have resulted in the current recession. Those problems were government interference.
Schiff explains that for too long the government was borrowing and spending too much because of cheap cash coming primarily from China. (China has loads of cash from selling products to wealthy consumers in the US. To increase their wealth, China invests that cash in US Treasury Bonds to gain interest. These interest rates are relatively low, but China gains because of the enormous amount of cash they are investing at what is supposed to be no risk. The result is China essentially finances US debt.)
Not investing cheap Chinese cash responsibly, the federal government promoted a culture of consumer borrowing and spending to keep our new service based economy growing. This was facilitated by the Federal Reserve who kept interest rates artificially low, which incentivized more and more borrowing and consumption.
Schiff argues that this cycle was not free market, capitalist economics and therefore was not sustainable. The market should have been determining interest rates all along and the government should have acted more responsibly, promoting savings and production. It is the government’s interference in the free market that caused the problem, and their increased interference will only make the current problems even worse.
Schiff argues that our deflationary recession will soon become an inflationary depression if the government does not reverse the course it is taking. The enormous increases in the money supply (printed by the Fed) and government borrowing and spending (Obama’s budget with a $1.8 trillion deficit) will no doubt result in inflation. In fact that is the desired result to combat the current deflation. But since this kind of government intervention has never worked in the past, the prospects of future experiments do not instill much confidence.
Schiff’s recommendation does not require the government do nothing though. If the government starts promoting savings and reduction of debt again while reallocating resources back to sectors of the economy that produce goods, the recession will be much shorter lived. However, if they continue to promote consumer borrowing and spending, as they currently are, our problems could and probably will get much worse.
As you watch the video, you will see that in spite of how correctly Schiff has called it in recent years, people are still reluctant to adopt his views. Mark Haines of CNBC is a perfect example, unprofessionally poking fun at Schiff at the end of the video. Not sure where Haines, a reporter and lawyer, thinks he gets authority from on these things. I will defer to Schiff on subjects of economics.
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Peter Schiff may be running for Senate in Connecticut in 2010. Check out his site and pledge your support!
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